At some point in our lives we decide what we want to be when we grow up. Some of us are fortunate enough to pick right the first time, while others hit dead-ends but keep trying until they find the right path. Once found, the real work begins, and we set out to achieve our goals, both personal and financial. When those two line up, good things can happen and successful careers are launched.
The accumulation of financial resources is high on the list for most of us engaged in business. We believe that the more money we have, the more choices we have in terms of who we share it with, what we do each day, where we live and how we pursue the quality of life that fulfills us. In our role as real estate advisors, we are grateful for the opportunity to connect with so many amazing people who found a way to achieve at the highest levels in their industries.
In this series we will discuss the three phases in what we call the Wealth Cycle. The first is wealth creation. The second is wealth preservation and the third is wealth distribution. In each, our risk profile is different and so is the process by which we make decisions about money. As we move through life our priorities shift and the balance between the quantity and quality of our lives changes accordingly. Thus, it is important to understand where we are in life to make business decisions that keep us on the right path. But taking risks, following our instincts and having to react to unexpected circumstances doesn’t always work out for the best, and our ‘mistakes’ can be time consuming and expensive. This is why it is so important to consider where we are in the wealth cycle, as it is perhaps our best guide to making informed decisions that serve our ultimate goals and objectives without taking on too much risk. So, let’s kick off the Wealth Creation phase by going back to the beginning; your first job.
For you, it may have started with a paper route or mowing lawns for the neighbors. You decided that there were some things you just had to have or things you just had to do. So you took it upon yourself to earn the money required to make it happen on your own. That motivation spurred you to take independent action to change your circumstances. You spent the time, took the risk and sacrificed other things and activities in pursuit of your goals. As a business owner making decisions every day, you still do the same thing. You are motivated to take the risk and make the effort to achieve your goals. Think back on how hard you have worked to build your business. You took risks, worked harder than the next guy, scrimped and saved, all so that you could accumulate enough wealth to have the freedom of choice that comes with it.
When we are in the wealth creation phase, we are generally young, ambitious and confident in our ability to succeed. Our appetite for risk is bigger, too. How many business owners have mortgaged their homes, tapped lines of credit, and otherwise put it all on the line to take things to the next level? In the wealth creation phase, there has to be a willingness to fail and enough time to start over and do it better the next time if you do. So, if you buy commercial real estate for investment in this phase, you must have the ability to bridge the gap between peaks in the real estate cycle.
This is particularly true today for buyers. Prices for Southern California industrial property values are more than double the previous peak back in 2008, though values have now leveled off and many expect at least a minor correction soon. But, for the investor in the wealth creation phase who has the time to go through another cycle, buying quality, functional property is still a good option, especially if they are a business owner who would rather pay down his own mortgage rather than do the same for a landlord. Supply is short and most SoCal submarkets have little land remaining for development. Vacancy is hovering in the 3% range in most submarkets and very little new product is being delivered due to the high cost and scarcity of industrial land suitable for ground-up development. That bodes well for potential long-term price appreciation.
For existing property owners still in the wealth creation phase of their lives, it may be wise to hold on to their current real estate, despite the windfall they would receive on a sale. These investors already own a virtually irreplaceable asset, and have the time to hold on until the next market peak, which could move prices to even higher levels than we see today. However, if existing facilities are inefficient or may require substantial additional investment for deferred maintenance or to cure functional obsolescence, then it may be a good time to trade up to something more suitable for the long term, despite having to pay a premium to do it.
The key factor for both buyers and sellers in the wealth creation phase is the ability to look long term, but that is a luxury that erodes with time, as we will see when we take a look at the other phases of the Wealth Cycle.
More on wealth creation next week. Stay tuned…
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